GDP growth projected to sharply contract in the developing world this year

Weak recovery possible in 2010, but pace and timing highly uncertain

March 31, 2009— Rich countries across the world are in simultaneous recession, with their output falling sharply in the last quarter of 2008. And of the 16 developing countries that have quarterly data available, 15 have shown a fourth-quarter GDP decline.

As heads of governments convene in London this week for the G-20 summit, the World Bank has sharply marked down its November 2008 forecast of 4.4 percent GDP growth in the developing world in 2009 to 2.1 percent, noting that there may be a weak recovery in 2010. However, the pace and timing of recovery remain highly uncertain.

Global GDP growth, after a robust eight-year stretch, is now set to contract by 1.7 percent this year, the World Bank predicts. This is a historic contraction, with world output set to decline for the first time since World War II.

“Even if global growth turns positive again in 2010, we are not yet out of the woods,” said Hans Timmer, Manager, Global Trends in the World Bank’s Development Prospects Group, “We expect that the level of GDP will remain well below potential, and so economic distress will remain acute for the next two years.”

Feeling the pulse of the global economy

Timmer explained that the global economy was going through “a perfect storm,” with the global recession, the credit crunch, and languishing confidence working together in a very negative dynamic.

The investment banking collapse last year and the ensuing credit crunch were followed by a sharp decline in industrial production across the world, especially in economies specializing in investment goods, such as Taiwan, China; and Japan.

The crisis was preceded by eight years of extraordinary economic growth in developing countries, supported by double-digit growth in investments. And investments are especially hard hit now by the tough financial conditions.

With the decline in industrial production has come an immediate fall in commodity prices—more than a 50 percent drop in oil prices and more than 40 percent in non-oil commodity prices.

The World Bank now expects a 6.1 percent contraction in 2009 in the volume of world trade in goods and services. The value of world trade will collapse much more because of the fall in commodity prices.

This is bad news for government revenues. It is the poorest countries that depend most on trade for their fiscal revenues. For example, in Lesotho, Swaziland and Cote d’Ivoire, between 40 and 50 percent of fiscal revenues come from trade.

“The immediate impact of the financial crisis has been on the private sector, but before the year is out, we will likely see many countries run into fiscal problems,” Timmer warned. “This is because governments are already beginning to see a decline in revenues, while their spending has to increase and borrowing costs are up.”

World GDP growth is likely to increase to 2.3 percent in 2010, but significant risks could mar this outlook. For example, if balance of payments crises are not prevented, much sharper contractions would occur in 2009, possibly continuing into 2010.

The outlook for developing regions

Europe and Central Asia has been worst affected by recent developments. GDP in the region is expected to fall by 2 percent in 2009, compared with a 4.2 percent increase in 2008.

Latin America and the Caribbean will also likely see GDP contract in 2009, although at the country level outturns may be diverse. Overall, GDP is projected to decline 0.6 percent following gains of 4.3 percent in 2008.

East Asia and the Pacific is likely to be most affected by the falloff in global investment and trade. Already this has cut sharply into industrial production and capital spending. GDP growth is expected to ease to 5.3 percent in 2009, as growth in China slumps to 6.5 percent, and several smaller economies in the region, including Thailand fall into recession.

Prospects for South Asia have been marked down to 3.7 percent growth for 2009, down from 5.6 percent growth in 2008. Though terms of trade have moved in the region’s favor with lower oil prices, weaker export demand is being felt sharply.

Growth in the Middle East and North Africa appears least affected among developing regions, now projected to be 3.3 percent in 2009. Reduced oil revenues and cuts in oil output will restrain GDP among oil exporters to 2.9 percent from 4.5 percent in 2008.

In Sub-Saharan Africa, GDP growth is expected to halve from 4.9 percent in 2008 to 2.4 percent in 2009. The dramatic shift in commodity prices will have strong effects across countries.

An emergency for development

World Bank analysis shows that the impact of the crisis is being felt by poor people across the world, many of whom were already hit hard by the food and fuel crises. The pace of poverty reduction has slowed, with about 65 million people estimated to remain under the $2 a day poverty line in 2009 as a result of the crisis.

“Conditions of recession are affecting the world’s poorest people, making them more vulnerable than ever to sudden shocks—but also reducing the opportunities available to them, and frustrating their hopes,” said Justin Yifu Lin, World Bank Chief Economist and Senior Vice President, Development Economics. “This could reverse years of progress, and is nothing less than an emergency for development.”

The upcoming Global Monitoring Report 2009, published annually by the World Bank and International Monetary Fund, and due to be released in late April, will assess the impact of the crisis on the 2015 Millennium Development Goals.